Time To Sell The Copper ETF?

Thanks to the strong dollar, commodity prices have been pretty depressed over the past few months. It also doesn’t help that many are looking for a slowdown in China, a key market for commodity demand.

This is especially true in the base metal market, as China is easily the biggest consumer of copper (and other industrial metals) in the world. So, when this important country is experiencing sluggish growth—and when the dollar is strong—it can be a rough period for copper investors.

This has been the case for much of 2013, as these two situations have both been in play, driving the price of copper lower. In fact, the main exchange traded way to play the metal, the iPath DJ-UBS Copper TR Sub Index ETN (NYSEARCA:JJC) has lost about 16% YTD, underscoring the deep downward trend in the copper market.

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Yet, despite this slump, some believe that there is reason to be optimistic about copper investing going forward, as evidenced by recent trading in the space. In Thursday’s session, JJC added about 2.1%, thanks to some fresh catalysts in the market.

Sudden Turnaround

First off, Goldman Sachs recently gave a more bullish short-term outlook for the metal. The investment company said that they expect an improvement in sentiment about demand to help cause a rebound over the next three months, a situation that could help JJC continue to bounce off of its lows.

Domestic data also helped to push the red metal higher in Thursday trading, as solid figures on the housing and jobs front added to the short term bull case for the metal. New home sales showed relatively low inventories, while jobless claims were rather low suggesting more demand for a variety of consumer goods in the future.

Let’s also not forget that some old-fashioned short-covering also played a big role in today’s gains for copper as well. “When you consider that copper’s fallen over 20%, it’s not hard to see a short covering rally,” said Ira Epstein, director of the Ira Epstein division at the Linn Group (read Time to Sell This Commodity ETF?).

Copper Outlook

Yet even with this bullish day, the trend for copper remains decidedly negative for the long term. Key emerging markets are failing to grow at robust rates, so extra demand is unlikely to come from beyond U.S. shores.

Further, pretty much every currency is weakening against the dollar, so this could add to the bearish case for copper investing over the long haul. This is especially true if Japan continues with its massive easing program, or if the ECB or BOE engage in some easing measures of their own in order to boost their struggling economies.

Either way, this looks to be a temporary positive blip on copper’s radar, investors should expect the metal to trend lower over the next few months. While the move was on solid volume, it wasn’t nearly enough for copper to break out above longer-term moving averages (also read the Key to International ETF Investing).

Instead, the metal remains depressed in a downtrend, and we expect it to stay there for quite some time. That is why we are maintaining our Zacks ETF Rank of 5 or ‘Strong Sell’ on JJC—and thus copper in general—as we are looking for more weakness ahead in this commodity ETF.

How to invest going forward

So if investors are still long copper, now could be a great time to get out of the weak space, or a good time to consider shorting the product. For a different, more positive, play on commodities, investors could consider the precious metals market instead.

While these commodity ETFs have also struggled, some are still seeing solid consensus outlooks. This is particularly the case in the white metal market, as ETFs playing platinum, palladium, and silver, have held up better than copper in the YTD time frame (see Time to Buy this Precious Metal ETF?).

Fortunately there are several options in this market allowing investors to buy up any of the individual metals (PPLT) , (PALL) , (SLV) or all three in a basket with (WITE) . While these are by no means immune to global trends, we think that any of them could be better positioned than copper in the near term andbe poised to rebound heading into May.